Guaranteed Mill Direct Back-Up
The Business Problem: For some manufacturers, the high volume of material used in their manufacturing makes direct buying from a mill a viable economic solution. Because of the high volume of material used, the consistency and regularity of production, direct orders can be placed with a mill allowing the manufacturer to shave a few percentage points off the cost of acquisition. These savings are sometimes enough to offset the high costs of holding inventory. (See "Just-In-Time Inventory")
Mills naturally set production schedules intended to gain economies of scale by aggregating the orders of many customers and achieving the highest production runs possible. While the benefit for the mill-direct buyer is a low per pound price, there exists a risks of delays in shipments due to changes in production schedules at mills. These delays can cause costly production changes and delays.
Manufacturers must either (1) hold more inventory on-hand to manage this risk, driving up total material costs, (2) face the risk of production shutdown due to lack of required material, or (3) pay high costs on the "spot" market that offsets the benefit of buying mill direct.
Insurance is available for virtually every business contingency. How can manufacturers guarantee material for production and receive materials at the mill-direct price without substantially increasing on-hand inventories?
The Solution: TSI and its mill partners have arranged a guaranteed mill-direct back-up program that insures a steady supply of material at a set price, taking advantage of mill-direct purchasing.
How it Works: After purchasing agent has calculated annual usage requirements and received pricing from the mill, the agent schedules orders for 90% of requirements with the mill and places 10% of requirements with TSI at a locked-in competitive price.
When there is a change in production at the mill that results in delivery delays, the purchasing agent contacts TSI and releases the 10% from TSI to maintain production schedules.
If there are no changes in mill production that require the release of material from TSI during the year, the purchasing agent requests the material to be released at years end as the final shipment.
While the cost of material from TSI is higher than that of the mill this cost is spread over the entire year's purchases and is reduced by savings from lowered inventory requirements.
In the example below, material costing $.21 a pound from a mill and $.29 a pound from TSI results in effective costs of $.22 a pound. This raises costs by $1,920 (3.8%) versus the cost of potential production disruptions. However, if on hand inventories are reduced by thirty days supply this higher cost is nearly entirely offset by inventory holding costs savings.
An alternate way to look at this program is to consider the costs of using the spot market to fill-in for lapses in mill deliveries. Assuming in this example that the spot market costs $.35 per pound, the effective cost is over $.22 a pound, raising costs $3,360 (6.7%) and $1,440 higher than the TSI Guaranteed Mill Direct Back-up.
The Result: For effectively no increase in costs (accounting for reduction in inventory holding costs) high volume manufacturers can have the best of both worlds, lower costs from mill-direct buying and guaranteed service and supply from TSI. Manufacturers can benefit from just-in-time inventory and focus on production, not inventory management.
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